July 9, 2021
As China Stockpiles Copper Supplies – Who are America’s Copper Allies?
Dear Retail Investor,
Copper is one of the most widely used industrial metals in the world because of its high ductility, malleability, thermal and electrical conductivity and resistance to corrosion.
And, if you’ve read The Diary before, you know we are very bullish on copper. Not only is it critical to the EV revolution, it’s also critical to other green energy infrastructure such as wind turbines and solar panels. Copper is also needed to build many of the infrastructure that is necessary to support a healthy economy, such as homes, power grids, plumbing systems, and broadband networks.
The reason we’re so bullish on copper is because, coupled with rising global demand, copper is in considerably short supply – especially in the wake of the pandemic, which saw many mining operations shut down and investment into new projects dry up.
‘Copper is the New Oil’
We’re not the only ones that feel this way. Goldman Sachs’ Global Head of Commodities Jeffrey Currie explained why copper he’s so bullish on copper in a recent interview with Bloomberg, comparing it to the rise of oil prices in the early 2000s:
“We like to say copper is the new oil – it’s the strategically most important commodity because if you’re going to electrify the world, copper conducts electricity better than any other element, which means that it is now the new oil,” Currie explains.
“The difference between copper today and oil say, two decades ago? At least with oil we knew shale was out there. Prices just had to get high enough to do it. In copper, there is no shale. We don’t know of any type of technology that can solve this problem,” he added.
Could We Really Run Out of Copper?
It is a topic that has been hotly debated for decades – while some industry experts argue that there is enough copper in the world to meet our growing demands, much of it has yet to be mined. Bringing a deposit into production takes time and a lot of money, and doing so in a way that meets increasingly stringent ESG requirements is something that not all companies are willing to take on. Furthermore, in the wake of a shift toward “impact investing”, the amount of available capital for the exploration and development of new copper deposits has dwindled in recent years.
Another problem is that existing copper deposits are experiencing grade declines and output depletions that over time are likely to lead to a deficit, unless new projects are discovered and exploited.
According to market analyst group S&P Global, without substantial investment into new copper deposit exploration and development, copper production will reach a deficit from 2024 onward. Coupled with heavy growth in demand, this decline in output could lead to a theoretical shortfall of around 16 Mt by 2040, according to Wood Mackenzie.
Currie thinks the copper deficit situation is more urgent than ever, stating:
“We start to look out – 5, 7 years – the deficit becomes unprecedented. It becomes on a market, 8 m tonne deficit, which means you’re going to have to increase scrap, you’re going to have to do a substitution into aluminum and other types of metals that can conduct electricity, and you’re going have to scrape to the bottom of the barrel of mining to be able to increase supply.”
A Major Shift in Global Asset Strategy
If there is one observable result from the pandemic, it is how COVID-19 has created global shifts in asset supply and demand.
Whether it’s vaccines, ventilators, lumber, oil, or food commodities such as corn, coffee, and soybeans – all have been in high demand with short supply during the pandemic.
While the global shortages of certain assets are down to quarantine-related supply chain issues such as manufacturing facility shut-downs, reduced labour supply, and a global shortage of shipping containers thanks to a massive increase in online shopping – the most important takeaway from all this is how governments and businesses are being forced to reconsider their supply chains and stockpiles.
Moreover, the implications on global trade and geopolitical challenges are re-shaping how nations manage and control the trade of critical assets. Global trade tensions are intensifying as political powers re-tool their asset infrastructure to position themselves for strength in a post-pandemic world.
The Infrastructure War Between China and the USA Heats Up
As countries seek to stockpile and control precious assets, the world’s two largest economies, China and America, are locked in a battle to secure a steady supply of the most widely used industrial metal, copper.
In America, U.S. President Joe Biden has vowed to spend $2 trillion on infrastructure development, in a program that will run for almost a decade. It is the biggest program of its kind since the late 1950s, when construction began on the interstate highway network.
The Chinese are also aggressively building up their infrastructure, and plan to dominate the EV market, including the commodities required to build those products.
The race to secure enough copper to meet these lofty goals is already on. The biggest issue for America is that China has an enormous lead. China is not only the world’s biggest consumer of copper – it is also the world’s second largest copper producer, behind Chile and ahead of Peru, two countries that it already exports a great deal of copper from.
China has been stockpiling copper for decades, but the onset of the pandemic gave it another edge. New copper projects were already in short supply before the pandemic, but when commodity prices tanked after the pandemic hit in March 2020, Chinese mining companies took advantage of these low prices and jumped into challenging regions like the DRC, to buy up copper assets at a discount.
As China quietly vacuums up valuable copper resources from its ally countries, it is essentially removing them from the world market while securing a reliable supply chain of the increasingly vital metal.
Meanwhile, competing countries must fight for increasingly scarce supplies and are reliant on outsourcing, driving up the price.
In fact, the price of copper has been driven up so much in recent months that China’s state reserves made the rare move last week of auctioning off 20,000 tonnes of copper in an effort to cool rallying metal prices that have pushed up raw material costs for Chinese manufacturers.
Australia: A Key Ally in Secure Supply
China’s stockpiling of copper has sparked debate over whether Washington needs to intervene to encourage more mining at home. But domestic mining is not the only way to secure copper supply in the US. Alternatively, mining collaborations with politically stable, mineral-rich allies like Australia are a promising strategy.
Historically, Australia has been a mining-friendly country, and mining has been an important source of its export income. With mining activities in all of its states and territories, Australia is the world’s 6th largest producer of copper, after Chile, China, Peru, the US, and the DRC.
But critically, Australia is a much more stable mining jurisdiction than the other top copper producers that the US could align itself with. Australia is a member of the Paris Agreement, and with a goal to reach net-zero carbon emissions by 2050, its government is spending billions on renewable energy projects. In fact, Tasmania is now 100% powered by renewable energy, with the majority of the state relying on hydroelectric systems – and other Australian states are rushing to follow suit. Australia’s eagerness to reach net zero emissions means that new mining projects are likely to be designed with ESG principals in mind, making them more attractive to institutional investors.
Australia already plays a key role for the US when it comes to critical minerals. In 2019, the United States and Australia formalized their partnership on developing both nations’ critical mineral assets between Geoscience Australia CEO James Johnson and U.S. Geological Survey (USGS) Director Jim Reilly. The two partners outlined specific steps to strengthen an existing Memorandum of Understanding by collaborating on research and increasing critical mineral capacity for both countries.
Additionally, in the wake of an intensifying trade war between Australia and China, the friendly trade relationship between Australia and America has only been strengthened. The US is becoming a key trade ally to Australia as China continues to impose steep tariffs on Australian imports. Given this mounting political tension, it is unlikely Australia will be exporting its copper to China any time soon.
In its most recent issue, The Economist published an article titled, People May One Day Drill for Copper as They Now Drill for Oil. Mining companies all over the world will be scrambling to find new copper discoveries that can boost copper supplies to meet rising demand in the coming decades. But new mine opportunities will be scarce, since big undeveloped deposits tend to be rare, or are already owned by the Chinese. If ever there were a bullish scenario for new copper projects in politically, environmentally and economically stable jurisdictions, it is now.
Our bets are on Australia.
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